PEACE OF MIND
Tax problems can cause worry and stress beyond their likely ramifications. I was not amused by the character played by Clint Eastwood in the film "Gran Torino" that mentioned a small but unreported profit on the sale of a boat engine in his final confession. The gentleman had worried for years over a matter that could have been cleared up or likely was no longer subject to sanction due to the statute of limitations.
On the other hand, otherwise honest and conscientious people can miss a deadline or overlook a source of income and, over time, this can lead to a difficult situation to resolve. Never underestimate the value of peace of mind.
ONE THING LEADS TO ANOTHER
It is not uncommon for someone who has missed a deadline to become pre-occupied with coming forward and thereafter fail to take corrective action or file the next year's returns. Once several years have "piled up," getting back on track can be daunting. Unfortunately, criminal investigators are looking for exactly such a pattern of conduct to build a case that the matter was intentional, as opposed to a mistake or simple oversight. "Late filing syndrome" is not a recognized legal defense.
SIDE JOBS, RENTAL UNITS & CASH MONEY ARE OF TREMENDOUS INTEREST TO HAWAII'S DEPARTMENT OF TAXATION
Sometimes a second job is considered too small to mention to a tax preparer. Tax authorities will not share this view. "Under the table" or "cash" jobs are of great interest to the tax authorities. In Hawaii, "independent contractors" are subject to General Excise Tax at 4% plus a County Surcharge on Oahu of .5%. An $800 a month second job produces approximately $10,000 per year gross or a GE/SC liability of approximately $450. This additional income will also generate an income tax assessment, and penalties and interest will apply to both assessments.
In Hawaii, there are a significant number of small rental units. In general, rental income is subject to General Excise and County Surcharge and may be subject to Transient Accommodations Tax. A $600/month studio apartment built into a carport or a cottage would only result in an approximate $325 annual GE tax bill and another (guesstimated) $500 in income tax. Yet that $825 per year could result in a criminal investigation and the authorities would probably consider a felony fraud and false statement charge.
By statute, Hawaii charges interest on unpaid tax balances at the rate of 2/3rds of a percent a month, translating to 8% per year. Over the past decade, this interest rate has been significantly higher than generally prevailing interest rates.
FIRST, DO NO HARM
"Knee jerk" reactions can make a difficulty into a catastrophe.
A classic reaction to discovering that a Failure to File criminal investigation has been launched is to file the outstanding returns as soon as possible. At best, the returns are an admission or confession that income was subject to the tax and that returns were not filed on time. Prepared hastily, the returns could be incorrect and the misdemeanor FTF investigation could rapidly morph into a felony tax fraud investigation based upon the newly filed returns.
A classic reaction to an audit inquiring into an area where completely correct returns are not on file is to submit an "amended" return disclosing overlooked or omitted items. Auditors may or may not accept amended returns during audit, and may proceed to dig further using the amended returns as a roadmap or guide for additional document requests. Questions about why the omissions can become difficult to answer. Its possible at some point for the auditor to break off contact and refer the matter for criminal investigation. As a result, amended returns, hastily submitted upon a contact, or during the course of an audit, can be extremely damaging.
Psychological preoccupation with the investigation can result in the substantial diminution of your quality of life. An audit or investigation can easily take eighteen months, and if you worry a couple hours a day, you will have consumed an important portion of your life with little or nothing to show for it. While you must respond to the demands of the tax authorities and your representative, and consider possible outcomes in your planning, you should not become pre-occupied or unable to function.